Mitsubishi Corporation - Manila Branch Vs.

Commissioner of Internal Revenue

G.R. No. 175772, June 5, 2017

Facts:

On June 11, 1987, the governments of Japan and the Philippines executed an Exchange of Notes, whereby the
former agreed to extend a loan amounting to Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to
the latter through the then Overseas Economic Cooperation Fund (OECF, now Japan Bank for International
Cooperation) for the implementation of the Calaca II Coal-Fired Thermal Power Plant Project (Project). In Paragraph 5
(2) of the Exchange of Notes, the Philippine Government, by itself or through its executing agency, undertook to
assume all taxes imposed by the Philippines on Japanese contractors engaged in the Project.

Consequently, the OECF and the Philippine Government entered into Loan Agreement No. PH-P768 dated
September 25, 1987 for Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000). Due to the need for
additional funding for the Project, they also executed Loan Agreement No. PH-P1419 dated December 20, 1994 for
Five Billion Five Hundred Thirteen Million Japanese Yen (¥5,513,000,000). Meanwhile, on June 21, 1991, the National
Power Corporation (NPC), as the executing government agency, entered into a contract with Mitsubishi Corporation
(i.e., petitioner's head office in Japan) for the engineering, supply, construction, installation, testing, and
commissioning of a steam generator, auxiliaries, and associated civil works for the Project (Contract). The Contract's
foreign currency portion was funded by the OECF loans. In line with the Exchange of Notes, Article VIII (B) (1) of the
Contract indicated NPC's undertaking to pay any and all forms of taxes that are directly imposable under the Contract.

Petitioner completed the project on December 2, 1995, but it was only accepted by NPC on January 31, 1998 through
a Certificate of Completion and Final Acceptance. On July 15, 1998, petitioner filed its Income Tax Return for the fiscal
year that ended on March 31, 1998 with the Bureau of Internal Revenue (BIR). Petitioner included in its income tax
due the amount of P 44,288,712.00, representing income from the OECF-funded portion of the Project. On the same
day, petitioner also filed its Monthly Remittance Return of Income Taxes Withheld and remitted P 8,324,100.00 as
BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March
31, 1998.

In a Decision dated December 17, 2003, the CTA Division granted the petition and ordered the CIR to refund to
petitioner the amounts it erroneously paid as income tax and BPRT. It held that based on the Exchange of Notes, the
Philippine Government, through the NPC as its executing agency, bound itself to assume or shoulder petitioner's tax
obligations. Therefore, petitioner's payments of income tax and BPRT to the CIR, when such payments should have
been made by the NPC, undoubtedly constitute erroneous payments under Section 229 of the NIRC.

The CIR moved for reconsideration but was denied in a Resolution dated April 23, 2004; thus, the CIR elevated the
matter to the CTA En Banc. In a Decision dated May 24, 2006, the CTA En Banc reversed the CTA Division's rulings
and declared that petitioner is not entitled to a refund of the taxes it paid to the CIR. Petitioner sought reconsideration,
but the CTA En Banc denied the motion in a Resolution dated December 4, 2006.

Issue:

Whether or not the petitioner is entitled to a refund of the income tax it paid representing income from the OECF-
funded portion of the Project, in line with the Exchange of Notes, Article VIII (B) (1) of the Contract which indicates
NPC's undertaking to pay all forms of taxes that are directly imposable under the Contract.

Held:

Yes, the petitioner is entitled to a refund. The CIR subsequently affirmed petitioner's non-liability for taxes and
entitlement to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-200547 addressed to specified BIR
offices. The RMO provides: Pursuant to the provisions of RMC No. 32-99 as amended by RMC No. 42-99, Japanese
contractors and nationals engaged in OECF funded projects in the Philippines shall not be required to shoulder the
fiscal levies or taxes associated with the project. Therefore, the concerned Japanese contractors are entitled to claim
for the refund of all taxes paid and shouldered by them relative to the conduct of the Project. Also, considering that
petitioner paid the subject taxes in the aggregate amount of P 52,612,812.00, which it was not required to pay, the
BIR erroneously collected such amount.

In this case, it is fairly apparent that the subject taxes in the amount of P 52,612,812.00 was erroneously collected
from petitioner, considering that the obligation to pay the same had already been assumed by the Philippine
Government by virtue of its Exchange of Notes with the Japanese Government. Case law explains that an exchange
of notes is considered as an executive agreement, which is binding on the State even without Senate concurrence.
Hence, the petition is GRANTED. The Decision dated May 24, 2006 and the Resolution dated December 4, 2006 of
the Court of Tax Appeals (CTA) En Banc are REVERSED and SET ASIDE. The Decision dated December 17, 2003
of the CTA is REINSTATED.